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September 9, 2011

Fannie, Freddie Subprime Settlement Could Say Mea Culpa

SEC deal may be near, but could fuel suit

The Securities and Exchange Commission may be close to a settlement with Fannie Mae and Freddie Mac over their descent into subprime housing loans and lack of disclosure surrounding them, but the path to resolution is not smooth.

Although the deal now contemplated lacks an admission of fraud or any financial penalty for mortgage deals that helped spark the financial crisis, a willingness to settle at all could serve as a tacit admission of guilt by the mortgage companies and fuel charges that they misled investors, according to a Thursday New York Times report.

The absence of fines was characterized as more a signal of the shaky fiscal status of the two mortgage finance giants than a mark of leniency, The Times said. After all, taxpayers would end up footing the bill for any financial penalties, on top of the more than $100 billion already spent by the government in keeping Fannie and Freddie afloat.

Yet no criminal charges have been filed by the Justice Department, and there is the possibility that none may be, despite the three-year-long investigation leading up to the possible settlement.

And it’s not a done deal, either. The government overseer keeping an eye on Fannie and Freddie brought suit last week against 17 financial firms, charging them with enticing Fannie and Freddie to buy bad loans. That case could get complicated if Fannie and Freddie acknowledge fault.

Fannie and Freddie bought thousands of loans during the real estate bubble, repackaged them and sold them to investors. The SEC has been investigating how they reported the subprime loans they resold and whether they mischaracterized them to mislead investors.